Solution Manual For Intermediate Accounting: Volume 1 (11th Canadian Edition) Hardcover ? 2016 by Bruce J. McConomy; Donald E. Kieso; Irene M. Wiecek; Jerry J. Weygandt; Nicola M

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CHAPTER 14

 

LONG-TERM FINANCIAL LIABILITIES

 

ASSIGNMENT CLASSIFICATION TABLE

 

Topics		Brief Exercises	Exercises	Problems
1.	Understand the nature of long-term debt.	1, 2	1, 2	1, 2
2.	Understand how long-term debt is measured and accounted for.	3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18	3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18	1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 13
3.	Recognition and derecognition of debt and debt restructurings.	19, 20, 21	17, 19, 20, 21, 22, 23, 24, 25, 26, 27, 28	6, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20
4.	Presentation of long-term debt.	24	16, 18, 29, 30	2, 8, 10
5.	Disclosure requirements.		31	9, 10
6.	Long-term debt analysis.	25		7
7.	Differences between IFRS and ASPE.

 

NOTE:  If your students are solving the end-of-chapter material using a financial calculator or an Excel spreadsheet as opposed to the PV tables, please note that there will be a difference in amounts. Excel and financial calculators yield a more precise result as opposed to PV tables. The amounts used for the preparation of journal entries in solutions have been prepared from the results of calculations arrived at using the PV tables.

 

ASSIGNMENT CHARACTERISTICS TABLE

 

Item		Description	Level of Difficulty	Time (minutes)
E14-1		Features of long-term debt.	Simple	10-15
E14-2		Information related to various bond issues.	Simple	35-45
E14-3		Entries for bond transactions.	Simple	15-20
E14-4		Entries for bond transactions—effective interest.	Simple	15-20
E14-5		Entries for bond transactions—straight-line.	Simple	15-20
E14-6		Entries for noninterest-bearing debt.	Simple	15-20
E14-7		Imputation of interest.	Simple	15-20
E14-8		Instalment note.	Moderate	15-20
E14-9		Purchase of equipment with noninterest-bearing debt.	Moderate	15-20
E14-10		Purchase of equipment with noninterest-bearing debt.	Moderate	15-20
E14-11		Entries for bond transactions.	Moderate	15-20
E14-12		Amortization schedule—straight-line.	Simple	15-20
E14-13		Amortization schedule—effective interest.	Simple	15-20
E14-14		Determine proper amounts in account balances.	Moderate	15-20
E14-15		Government interest free loan	Moderate	15-20
E14-16		Entries and questions for bond transactions.	Moderate	20-30
E14-17		Entries for retirement of bonds.	Simple	10-15
E14-18		Entries for retirement and issuance of bonds – straight line.	Simple	15-20
E14-19		Entries for retirement and issuance of bonds – effective interest.	Complex	30-35
E14-20		Entry for retirement of bond; bond issue costs.	Moderate	20-25
E14-21		Entries for retirement and issuance of bonds.	Simple	15-20
E14-22		Impairments.	Moderate	15-25
E14-23		Settlement of debt.	Moderate	15-20
E14-24		Term modification debtor’s entries.	Moderate	20-30
E14-25		Term modification creditor’s entries.	Moderate	25-30
E14-26		Settlement debtor’s entries.	Moderate	25-30
E14-27		Settlement creditor’s entries.	Moderate	20-30
E14-28		Debtor/creditor entries for modification of troubled debt.	Moderate	20-25

 

 

ASSIGNMENT CHARACTERISTICS TABLE (CONTINUED)

 

Item		Description	Level of Difficulty	Time (minutes)
E14-29		Classification of liabilities	Simple	15-20
E14-30		Classification.	Simple	15-20
E14-31		Long-term debt disclosure.	Simple	10-15
P14-1		Entries for noninterest-bearing debt; payable in instalments.	Moderate	30-35
P14-2		Contrasting note terms.	Complex	50-60
P14-3		Analysis of amortization schedule and interest entries	Simple	15-20
P14-4		Issuance and retirement of bonds.	Moderate	25-30
P14-5		Comprehensive bond problem.	Complex	50-65
P14-6		Issuance of bonds between interest dates, straight-line, retirement.	Complex	30-35
P14-7   P14-8		Entries for noninterest-bearing debt. Classification of accounts used in bond issuance	Simple Moderate	15-25 55-65
P14-9		Issuance and retirement of bonds; income statement presentation.	Simple	15-20
P14-10		Comprehensive problem; issuance, classification, reporting.	Moderate	20-25
P14-11		Issuance of bonds between interest dates, effective interest, retirement.	Complex	30-35
P14-12		Entries for life cycle of bonds.	Moderate	20-25
P14-13		Bonds at discount and premium incl. partial redemption	Complex	45-50
P14-14		Loan impairment entries.	Moderate	30-40
P14-15		Debtor/creditor entries for continuation of troubled debt.	Moderate	15-25
P14-16		Restructure of note under different circumstances.	Complex	50-60
P14-17		Debtor/creditor entries for continuation of troubled debt.	Complex	40-50
P14-18		Entries for troubled debt restructuring.	Moderate	30-35
P14-19     P14-20		Debtor/creditor entries for continuation of troubled debt with new effective interest. Legal versus in-substance defeasance	Complex     Moderate	40-50     15-20

 

 

SOLUTIONS TO BRIEF EXERCISES

 

BRIEF EXERCISE 14-1

 

• A bond’s credit rating is a reflection of credit quality. The BBB- credit rating of the bond at the time of issuance reflected an assessment of the company’s ability to pay the amounts that will be due on that specific bond. With four consecutive quarters of increasing losses and deteriorating financial position in 2017, and new competition in the industry, credit analysts may downgrade the bond’s credit rating to below investment grade.

 

• The market closely monitors a bond’s credit rating when determining the required yield and pricing of bonds at issuance and in periods after issuance. If the bond’s credit rating is downgraded, the yield required by investors will likely increase, and the price of the bonds will likely decrease, to compensate the bondholder for the additional risk associated with that specific bond.

 

BRIEF EXERCISE 14-2

 

• Financing is generally obtained through three sources: borrowing, issuing shares, and/or using internally generated funds. Leverage (or using borrowed money to increase returns to shareholders) can maximize returns to shareholders, and the related interest paid is tax deductible. However, borrowed funds must be repaid and can increase liquidity and solvency risk. Issuing shares does not increase liquidity and solvency risk; however, it may result in dilution of ownership. Using internally generated funds may be appropriate if the company’s business model is generating excess funds.

 

• Based on the information provided, borrowing is the most suitable source of financing for Jensen & Jensen. With a debt to total assets ratio of 55%, Dowty is underleveraged compared to similar size competitors operating in the same industry. This means that Jensen & Jensen may not be maximizing returns to shareholders, and that the company may be able to finance the expansion by borrowing and still maintain an acceptable level of liquidity and solvency risk. As a telecommunications equipment manufacturer, Jensen & Jensen operates in a capital intensive industry, and a lender may be able to structure the lending agreement in such a way as to secure the loan with the company’s underlying tangible assets. Further, issuing shares is not ideal given the owners’ desire to keep the company closely held.

 

 

 

BRIEF EXERCISE 14-3

 

1) Using tables:

 

Present value of the principal
$500,000 X .37689	$188,445
Present value of the interest payments
$27,500 X 12.46221	342,711
Issue price	$531,156

 

2) Using a financial calculator:
PV	?	Yields $ 531,156
I	5%
N	20
PMT	$    (27,500)
FV	$  (500,000)
Type	0

 

3) Using Excel: = PV(rate,nper,pmt,fv,type)

 

 

 

BRIEF EXERCISE 14-4

 

(a)	Cash………………………………………………………………….	300,000
	Notes Payable…………………………………………..		300,000
(b)	Interest Expense……………………………………………….	24,000
	Cash ($300,000 X 8%)………………………………..		24,000

 

 

 

BRIEF EXERCISE 14-5

 

(a)  1) Using tables:

Present value of the principal
$200,000 X .74409	$148,818
Present value of the interest payments
$8,000 X 8.53020	68,242
Issue price	$217,060

 

2) Using a financial calculator:
PV	?	Yields $ 217,060.41
I	3%
N	10
PMT	$    (8,000)
FV	$  (200,000)
Type	0

 

3) Using Excel: =PV(rate,nper,pmt,fv,type)

 

(b)	Cash………………………………………………………………….	217,060
	Bonds Payable………………………………………….		217,060
(c)	Interest Expense   ($217,060 X 6% X 6/12)…………………………………….	6,512
	Bonds Payable ($8,000 – $6,512)……………………….	1,488
	Cash ($200,000 X 8% X 6/12)……………………..		8,000
	Interest Expense   [($217,060 – $1,488) X 6% X 6/12]…………………….	6,467
	Bonds Payable ($8,000 – $6,467)……………………….	1,533
	Cash ($200,000 X 8% X 6/12)……………………..		8,000

 

 

BRIEF EXERCISE 14-6

 

• 1) Using a financial calculator:

PV	$52,000
I	?	Yields 15.09%
N	5
PMT	$    0
FV	$  (105,000)
Type	0

 

2) Using Excel: =RATE(nper,pmt,pv, fv,type)
	(b)	Cash………………………………………………………………….	52,000.00
		Notes Payable…………………………………………..			52,000.00
	(c)	Interest Expense ($52,000X 15.09%)………………….	7,846.75
		Notes Payable…………………………………………..			7,846.75

 

 

(d) Schedule of Discount Amortization
Effective Interest Method (15.09%)
				15.09%
				Effective	Discount	Carrying
	Date			Interest	Amort.	Value
	Jan. 1	2017				$52,000.00
	Dec. 31	2017		$7,846.75	$7,846.75	59,846.75
	Dec. 31	2018		9,030.81	9,030.81	68,877.56
	Dec. 31	2019		10,393.55	10,393.55	79,271.11
	Dec. 31	2020		11,961.93	11,961.93	91,233.04
	Dec. 31	2021		13,766.96*	13,766.96	105,000.00
				$53,000.00	$53,000.00

* rounded

 

BRIEF EXERCISE 14-7

 

(a)	Equipment…………………………………………………	38,912
	Notes Payable…………………………………..		38,912
(b)	Interest Expense……………………………………….	4,280*
	Cash…………………………………………………		2,500**
	Notes Payable…………………………………..		1,780
	*($38,912 X 11.00% = $4,280)
	**($50,000 X 5% = $2,500)

 

Using a financial calculator:
PV	$ 38,912
I	?	Yields 11.00% (rounded to 2 decimal places)
N	5
PMT	$(2,500)
FV	$ (50,000)
Type	0

 

 

BRIEF EXERCISE 14-8

 

Cash………………………………………………………………….	200,000
Notes Payable…………………………………………..		176,448

 

The difference between the present value (using an 8% discount rate) and proceeds, is recorded as unearned revenue, since Big Country agreed to provide cattle at a reduced price over the term of the note. The amount will be brought into revenue over the term of the note, as the cattle are provided to Little Town.

Excel formula: =PV(rate,nper,pmt,fv,type)

 

Using a financial calculator:
PV	?	Yields $ 176,448
I	8%
N	6
PMT	0
FV	$ (280,000)
Type	0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BRIEF EXERCISE 14-9

 

The relevant interest rate to be imputed on the instalment note is the rate Pflug would pay at its bank of 11%

 

1) Using tables:

 

Using Ordinary Annuity Tables for 11% for two periods, the factor of 1.71252 is used and divided into the present value amount of $40,000 to arrive at the amount of the equal instalment payment of $23,357.39

 

2) Using a financial calculator:

 

 

PV	$ (40,000)
I	11%
N	2
PMT	?	Yields  $ (23,357.35)
FV	$  0
Type	0

 

3) Using Excel: = PMT(rate,nper,pv,fv,type)
BRIEF EXERCISE 14-10

 

(a)	Cash ($500,000 – $25,000)………………………..	475,000
	Bonds Payable………………………………..		475,000
(b)	Interest Expense ($40,000* + $2,500**)……..	42,500
	Bonds Payable………………………………..		2,500
	Cash*……………………………………………….		40,000
	* $500,000 X 8% = $40,000
	** $25,000 issue cost X 1/10 = $2,500

 

(c)     When a note or bond is issued, it should be recognized at fair value adjusted by any directly attributable issue costs. However, note that where the liability will subsequently be measured at fair value (e.g., under the fair value option or because it is a derivative), the transaction costs should not be included in the initial measurement (i.e., the costs should be expensed) [CPA Canada Handbook, Part II, Section 3856.07 and IFRS 9.5.1.1].

 

(d)     If the bonds were trading on the market for over their face value, this would imply that the bonds were not actually issued at face value, but rather that the interest rate paid on the bonds exceeds market rate, and thus, the bonds are trading at a premium. This reflects the fair value hierarchy, whereby observable market prices for identical assets and liabilities is first on the hierarchy, and thus, if fair value was being used to record these bonds, their value would be higher than what is currently recorded.

 

 

 

BRIEF EXERCISE 14-11

 

(a)	Cash………………………………………………………………….	300,000
	Bonds Payable………………………………………….		300,000
(b)	Interest Expense……………………………………………….	15,000
	Cash ($300,000 X 10% X 6/12)……………………		15,000
(c)	Interest Expense……………………………………………….	15,000
	Interest Payable………………………………………..		15,000

 

 

BRIEF EXERCISE 14-12

         

(a)	Cash ($300,000 X .98)………………………….	294,000
	Bonds Payable……………………………		294,000
(b)	Interest Expense…………………………………	15,600
	Cash ($300,000 X 10% X 6/12)……..		15,000
	Bonds Payable……………………………		600
	($6,000 X 1/5 X .5 = $600)
(c)	Interest Expense…………………………………	15,600
	Interest Payable………………………….		15,000
	Bonds Payable……………………………		600

 

 

 

BRIEF EXERCISE 14-13

 

(a)	Cash ($300,000 X 1.03 = $309,000)………	309,000
	Bonds Payable……………………………		309,000
(b)	Interest Expense…………………………………	14,100
	Bonds Payable ($9,000 X 1/5 X .5)……….	900
	Cash ($300,000 X 10% X 6/12)……..		15,000
(c)	Interest Expense…………………………………	14,100
	Bonds Payable…………………………………….	900
	Interest Payable………………………….		15,000

 

 

BRIEF EXERCISE 14-14

 

(a)	Cash………………………………………………………………….	615,000
	Bonds Payable………………………………………….		600,000
	Interest Expense……………………………………….		15,000
	($600,000 X 6% X 5/12 = $1,500)
(b)	Interest Expense……………………………………………….	18,000
	Cash           ………………………………………………………………….		18,000
	($600,000 X 6% X 6/12 = $18,00)
(c)	Interest Expense……………………………………………….	18,000
	Interest Payable………………………………………..		18,000

 

 

 

BRIEF EXERCISE 14-15

 

(a)	Cash………………………………………………………………….	559,229
	Bonds Payable………………………………………….		559,229
(b)	Interest Expense……………………………………………….	22,369
	Cash………………………………………………………….		21,000
	Bonds Payable………………………………………….		1,369
(c)	Interest Expense……………………………………………….	22,424
	Interest Payable………………………………………..		21,000
	Bonds Payable………………………………………….		1,424

 

(d) Using a Financial Calculator:

FV =	(600,000)		Given
n =	20		10 years X 2
PMT =	(21,000)		Face X 7% X 6/12
i =	4.0%		Calculate
PV =	559,229		Given

 

(e) Schedule of Discount Amortization

Effective Interest Method (4%)

 

			3.5%		4.0%
			Cash		Interest	Discount	Carrying
Date			Paid		Expense	Amortized	Amount
Jan. 1	2017						$559,229.00
July 1	2017		$21,000.00		$22,369.16	$1,369.16	560,598.16
Jan. 1	2018		21,000.00		22,423.93	1,423.93	562,022.09
July 1	2018		21,000.00		22,480.89	1,480.89	563,502.97

 

BRIEF EXERCISE 14-16

 

(a)	Cash………………………………………………………………….	644,632
	Bonds Payable………………………………………….			644,632
(b)	Interest Expense……………………………………………….	19,339
	Bonds Payable…………………………………………………..	1,661
	Cash………………………………………………………….			21,000
(c)	Interest Expense……………………………………………….	19,289
	Bonds Payable…………………………………………………..	1,711
	Interest Payable………………………………………..			21,000

(d) Using a Financial Calculator:

FV =	(600,000)		Given
n =	20		10 years X 2
PMT =	(21,000)		Face X 7% X 6/12
i =	3.0%		Calculate
PV =	664,632		Given

 

(e) Schedule of Premium Amortization

Effective Interest Method (3%)

 

			3.5%		3.0%
			Cash		Interest	Premium	Carrying
Date			Paid		Expense	Amortized	Amount
Jan. 1	2017						$644,632.00
July 1	2017		$21,000.00		$19,338.96	$1,661.04	642,970.96
Jan. 1	2018		21,000.00		19,289.13	1,710.87	641,260.09
July 1	2018		21,000.00		19,237.80	1,762.19	639,497.89

 

 

BRIEF EXERCISE 14-17

 

(a)	Cash………………………………………………………………….	1,058,671
	Bonds Payable………………………………………….			1,058,671
(b)	Interest Expense……………………………………………………		5,293*
	Bonds Payable………………………………………………………		17,207
	Cash……………………………………………………………..				22,500**
	*($1,058,671 x 2% x 3/12 = $5,293) **($1,000,000 x 9% x 3/12 = $22,500)

 

BRIEF EXERCISE 14-18

 

(a)	Interest Expense ($1,000,000 X 7%)…………..	70,000
	Cash…………………………………………………		70,000
	Bonds Payable ($1,000,000 – $900,000)……..	100,000
	Unrealized Gain or Loss …………………..		100,000
	The unrealized gain or loss is recorded in net income.
(b)	Interest Expense ($1,000,000 X 7%)…………..	70,000
	Cash…………………………………………………		70,000
	Bonds Payable ($1,000,000 – $900,000)……..	100,000
	Unrealized Gain or Loss – OCI…………..		100,000
	The unrealized gain or loss is recorded in other comprehensive income.

 

 

BRIEF EXERCISE 14-19

 

Bonds Payable ($800,000 + $6,500)…………..	806,500
Cash ($800,000 X .97)……………………….		776,000
Gain on Redemption of Bonds…………		30,500

 

 

BRIEF EXERCISE 14-20

 

This is a situation where a currently maturing liability (a current liability) at year end is expected to be refinanced on a long-term basis.

 

Under IFRS, this loan liability is required to be reported as a current liability on the December 31 financial statements because it was not refinanced by the reporting date. The only exception permitted would be if the refinancing that extends the repayment terms was done under an agreement that existed at December 31 and the decision about the refinancing is solely up to the discretion of the entity’s management.

 

The ASPE standard, however, allows a little more flexibility. The maturing debt is required to be reported as a current liability unless it has been refinanced on a long-term basis or there is a non-cancellable agreement to do so before the financial statements are completed, and there is nothing that prevents completion of the refinancing. Because the entity’s financial statements would not have been completed as soon as two days after the reporting date (December 31) when the new agreement was finalized, ASPE would permit the debt to be included with long-term liabilities.